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What’s 'toxic debt?' An expert discusses red flags and tips to avoid expensive debt

If you're paying a significantly high interest rate, it could be a sign of "toxic debt."

Young woman indoors working from home in lockdown, head in hands.
Halfpoint Images | Moment | Getty Images

The word debt can often have a bad connotation, but not all debt is necessarily "bad." Some types of debt, such as student loans and/or mortgages, allow you to use leverage to help you better your financial future. Plus, their low interest rates enable you to take advantage of cheap financing over time.

On the other end of the spectrum is what we refer to as "toxic debt." Unlike low-interest-rate debt, toxic debt is a loan that's issued with a significantly high interest rate (usually a rate north of 30%). In other words, toxic debt is debt that has little chance of being paid back with interest — a characteristic that can be particularly toxic to both the lender and the borrower.

"The loan will usually cost you significantly more than the value of the loan amount," Trina Patel, financial advice manager for personal finance app Albert, tells Select. Examples include payday loans, or loans from predatory lenders that are characterized by unreasonable fees, rates and payments.

When you're strapped for cash, payday loans seem like an easy fix as they can be a quick way to get the money you need, but their interest rates are exorbitantly high. In some states without regulations, you might pay more than 500% in interest for just a short-term loan of a few hundred dollars, which quickly grows over time when you can't repay the balance.

Because toxic debt could be wreaking havoc on your finances without you even realizing, below we share signs you might already have it, plus tips to avoid or get out of toxic debt.

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Signs you might already have toxic debt

Are you making consistent payments towards a debt obligation, yet the balance continues to still grow because of a high interest rate? Patel points out this is one sign your debt is toxic, leaving you stuck paying off a forever accruing balance and never actually getting rid of the debt entirely.

A second sign, Patel suggests, is if your debt-to-income ratio is high. This ratio shows how much debt you have relative to your income. Whereas a low debt-to-income ratio indicates that you earn more than you owe, a high ratio means that more of your paycheck goes toward paying your debts.

To calculate your debt-to-income ratio, divide your total monthly payments (credit card bills, rent or mortgage, car loan, student loan, payday loan) by your gross monthly earnings (what you make each month before taxes and any other deductions). This calculation will naturally take into account the interest rate you pay on your different debts each month, so you can see how it all adds up quickly.

"The higher the ratio, the higher your debt obligation is, and you'll want to take immediate steps to pay down your debt," Patel says.

Tips to avoid or get out of toxic debt

It's obvious that you should try to avoid toxic debt at all times, but that can be easier said than done.

If you find yourself in a situation where you have an immediate need for additional cash, Patel recommends first asking a family member or trusted friend to borrow money and creating a repayment plan with them.

Another option is to take out a personal loan through a bank or credit union. Personal loans often have lower interest rates than credit cards, and consumers can use them to finance nearly every kind of expense or to consolidate debt.

LightStream, for example, offers some of the lowest-interest loans we found when ranking the best personal loans, ranging from 7.49% - 24.49% APR when you sign up for autopay. Borrowers can even receive their funds on the same day, if applied and approved on a weekday by 2:30 p.m. ET, and loan term lengths are some of the longest offered, ranging from 24 to 144 months.

LightStream Personal Loans

  • Annual Percentage Rate (APR)

    7.99% - 24.99%* APR with AutoPay

  • Loan purpose

    Debt consolidation, home improvement, auto financing, medical expenses, and others

  • Loan amounts

    $5,000 to $100,000

  • Terms

    24 to 144 months* dependent on loan purpose

  • Credit needed


  • Origination fee


  • Early payoff penalty


  • Late fee


Terms apply. *AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Excellent credit required for lowest rate. Rates vary by loan purpose.

While LightStream requires applicants to have good credit or higher, there are personal loans for those with bad credit as well. Here are Select's top picks:

If the above options aren't viable, you could lastly consider using your credit card, whether by simply swiping it or taking out a cash advance (cash advances usually have a fee of about 5% or more, note you'll start getting charged interest immediately on the cash advance). Though credit cards have some of the highest interest rates, it's still less expensive than what you would pay if you take out a payday loan you can't afford to pay off.

In this scenario, Patel suggests talking to your credit card company about lowering your interest rate. You could also consider taking out a low-interest-rate credit card or a credit card with a 0% APR intro period like the U.S. Bank Visa® Platinum Card, which provides one of the best overall intro APR periods: 0% for the first 18 billing cycles on balance transfers and purchases (after, 19.49% - 29.49% variable APR; cardholders must complete balance transfers within 60 days from account opening). This is one of the longest interest-free periods for both balance transfers and purchases. With such a long intro period, ideally you can pay off your debt within that time frame and not have to pay additional interest.

"With all of these options, it's important to create a plan to repay this debt," Patel says. "I would also recommend reviewing your budget to see where you can reduce spending and start building an emergency savings fund so you can avoid this in the future."

U.S. Bank Visa® Platinum Card

Information about the U.S. Bank Visa® Platinum Card has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.
  • Rewards


  • Welcome bonus


  • Annual fee


  • Intro APR

    0% for the first 18 billing cycles on balance transfers and purchases

  • Regular APR

    19.49% - 29.49% (Variable)

  • Balance transfer fee

    Either 3% of the amount of each transfer or $5 minimum, whichever is greater

  • Foreign transaction fee

    2% to 3%

  • Credit needed


See rates and fees. Terms apply.

Consider a credit counselor to build good financial habits

And if you already have toxic debt, prioritize taking steps to eliminate it completely. Patel suggests starting by talking to a credit counselor who can help you explore your options. The most reputable credit counseling organizations are nonprofits, and you can take advantage of their programs free of charge or at an affordable fixed rate. You won't pay high fees to meet with one, like you might with a financial advisor

To get started, search for an accredited credit counseling organization in your area on the FCAA website or by phone at (800) 450-1794. You can also search on the NFCC website (search by zip code at the bottom), or call at (800) 388-2227.

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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